SLAVIANSK, Ukraine (Reuters) — Pro-Russian
rebels shot down two Ukrainian helicopters on Friday, killing two crew,
as troops tightened their siege of separatist-held Slaviansk in what
Moscow called a "criminal" assault by Kiev that wrecked hopes of peace.

President Vladimir Putin's spokesman said the Kremlin was
"extremely worried" that it had not heard from an envoy Putin had
sent to the eastern city to help free foreign hostages. He said the
"punitive operation" mounted by Ukrainian forces had destroyed a
peace plan agreed with Western powers two weeks ago.

The Ukrainian Defence Ministry said in a statement that two Mi-24
helicopter gunships were shot down by shoulder-launched
anti-aircraft missiles while on patrol overnight around Slaviansk, a
city that rebels have turned into a heavily-fortified stronghold.
Two airmen were killed and others wounded. The attack helicopter
normally has two crew but can carry more.

Other Ukrainian officials and the separatist leader in Slaviansk had
said earlier that one airman was taken prisoner.

A third helicopter, an Mi-8 transport aircraft, was also hit and a
serviceman wounded, the Defence Ministry said. The SBU security
service said this helicopter was carrying medics.

Eight hours after Reuters journalists in Slaviansk heard shooting
break out and saw one helicopter opening fire, the city of 130,000
was quiet, with shops shut and armed separatists in control of the
streets while Ukrainian forces in armored vehicles had taken up
positions on the outskirts of town.

Ukrainian officials said troops overran rebel checkpoints around the
city in an operation launched before dawn and it was now "tightly
encircled". They pointed to the heavy fire that hit the helicopters
as proof of the presence of Russian forces, despite repeated denials
from Moscow that it has troops on the ground or is controlling the
uprising.

Putin's spokesman heaped blame on the Ukrainian government, which
took power two months ago after pro-Western protests forced the
Kremlin-backed elected president to flee to Russia.

Noting that Putin had warned before that any "punitive operation"
would be a "criminal act", Dmitry Peskov told Russian news agencies
that this was what had now happened at Slaviansk, where separatists
seeking independence or annexation by Moscow are holding seven
foreign European military observers.

Saying Putin had sent an envoy, Vladimir Lukin, to southeast Ukraine
to negotiate their release, Peskov said that Lukin had not been
heard from since the Ukrainian operation began.

"While Russia is making efforts to de-escalate and settle the
conflict, the Kiev regime has turned to firing on civilian towns
with military aircraft and has begun a punitive operation,
effectively destroying the last hope of survival for the Geneva
accord," he said, referring to a deal on April 17 signed by Russia,
Ukraine, the United States and the European Union.

Under that agreement, separatists were supposed to lay down their
arms and vacate the public buildings they have seized in about a
dozen towns they have seized across the Russian-speaking east. Since
then, however, they have tightened their grip.

BARRICADES

Gunmen in Slaviansk said they were holding their ground against
Ukrainian forces that have struggled to assert control over the past
month. Some threw up new barricades of felled trees. And dozens of
civilians blocked a road against a unit of Ukrainian armored
vehicles, telling troops to go home.

Reuters journalists in the city heard shooting from shortly after 4
a.m. (9 p.m. EDT Thursday) and saw a military helicopter open fire.
Towards midday, the city was quiet, shops were shut but rebel gunmen
appeared to be still in tight control of the streets. Ukrainian
troops were at a halt in the suburbs.

The SBU said the deadly use by the separatists of shoulder-launched
anti-aircraft missiles was evidence that "trained, highly qualified
foreign military specialists" were operating in the area "and not
local civilians, as the Russian government says, armed only with
guns taken from hunting stores".

Russia denies involvement but has massed troops on the border and
threatened to intervene to protect the Russian-speaking majority in
eastern Ukraine from what it calls an illegitimate, Western-backed
government in Kiev. Alarmed Western powers believe President
Vladimir Putin is set on asserting Moscow's influence over its
former Soviet neighbors.

Armed groups seeking union with Russia have seized a number of
government buildings in towns in eastern Ukraine. The action in
Slaviansk appeared to mark the heaviest military response by Kiev
since it tightened a cordon around the city a week ago.

"They wanted to carry out some small-scale tactical operations just
to scare the people," said a militant manning a checkpoint leading
to the army-held airfield. "But so far things have not worked out
the way they wanted."

On his Facebook page, Interior Minister Arsen Avakov posted: "The
goal of our anti-terrorist operation and, at the same time, our
demands to the terrorists are simple:

"Free the hostages, lay down weapons, vacate administrative
buildings and get municipal infrastructure back to normal."

He added: "We are ready to negotiate with the protesters and their
representatives. But terrorists and armed separatists (will get)
only inevitable retribution."

He urged local people to stay
indoors and said Ukrainian forces, from the Interior Ministry,
National Guard and the armed forces, had orders not to fire on
residential buildings.

Support for the separatist movement is patchier in eastern Ukraine
than it was among the majority ethnic Russian population of Crimea,
which Moscow seized and annexed in March. However, many are fearful
of the new authorities in Kiev and have little faith in Ukraine
after 23 years of post-Soviet independence marked by rampant
corruption and poor living standards.

"Shells came into my garden," said one local man, Gennady. "They say
that they have come to defend us. But who from?" he said of the
Ukrainian forces. "Civilians must stop them."

On the town's southern outskirts, eight Ukrainian armored personnel
carriers cut off the road but faced a cordon two deep of local
residents shouting at them to go home.

MAY DAY

The clashes around Slaviansk came only hours after Russia staged a
huge May Day parade on Moscow's Red Square on Thursday — its first
since the Soviet era — with workers holding banners proclaiming
support for Putin after the seizure of territory from neighboring
Ukraine.

On Wednesday, Ukraine's leaders — who came to power in February when
the previous Moscow-backed president was toppled after months of
protests — conceded they were "helpless" to counter the fall of
government buildings and police stations in the Donbass coal and
steel belt. Donbass is the source of up to a third of Ukraine's
industrial output.

Separatists had also stormed the prosecutor's office in the city of
Donetsk on Thursday, throwing rocks, firecrackers and teargas at
riot police defending officials they accused of working for the
Western-backed government in Kiev.

Rebels in the city, capital of a province of 4.3 million, have
declared a "People's Republic of Donetsk" and called a referendum on
secession for May 11, undercutting a planned presidential election
in Ukraine two weeks later.

Having seized buildings in the capital of the easternmost province,
Luhansk, on Tuesday, gunmen took control at dawn on Wednesday in the
nearby towns of Horlivka and Alchevsk.

The International Monetary Fund warned that if Ukraine lost
territory in the east it would have to redesign a $17 billion
bailout of the country, probably requiring additional financing.

Citing the situation in the east, acting Ukrainian President
Oleksander Turchinov has signed a decree reinstating compulsory
military service for men aged between 18 and 25.

The Kiev government, along with its Western allies, accuses Moscow
of orchestrating the uprising. The United States and European Union
have imposed sanctions in response to Russia's annexation of Crimea
and involvement in eastern Ukraine.

The intervention in Ukraine has been enormously popular in Russia.
One opinion poll on Wednesday showed 82 percent support for Putin,
his highest rating since 2010.